This one simple fact is why Nomura thinks you should buy the Costa Coffee owners' stock

Britain seems to have a coffee shop on every corner and in London, it is certainly difficult to find a single street that doesn’t have at least two or three cafes on it.

However, if you think Britain’s high streets are over-saturated with coffee shops, you’d be wrong.

In fact, Tim Barrett and his team at Nomura said that there is one simple fact as to why there is still massive room for growth in the coffee shop sector. It is also for this reason why Nomura placed a “buy” rating on Whitbread’s stock — the owners of Costa Coffee:

The UK out-of-home coffee market has had exceptional growth in the past five years, which we expect to continue given the relative immaturity of the category (UK coffee consumption of 3kg/capita is above 40% below European average).

Costa Coffee has 2,000 UK outlets — two and a half times the amount of global brand Starbucks.

Nomura says that not only has Costa Coffee demonstrated over 10 years of like-for-like sales growth (5.5% average), the group’s management strategy and target to £2 billion of system sales in Costa by 2020 is totally “achievable.”

Barrett and his team said in the note this morning (emphasis ours):

Management change has been a feature of the investment case over the past year. Alison Brittain joined as CEO in December — we are encouraged that she has already endorsed the 2020 rollout milestones, citing them as a major attraction of the role.

This should reassure bears who believed the change in management might prompt target revisions. Her focus will be on executing against targets and improving systems and processes in order to secure productivity increases. Notably, under the previous CEO group EBIT margins were broadly unchanged over a five-year tenure — we see upside here given high drop-through on rate growth and the potential for Costa’s international business to generate a material profit.

Whitbread’s stock is currently at 4,274.17p per share but Nomura says the target price is at 5,690p.

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